25 Jun Modernising commodity trading: Why I founded BLOC-X

Over $1 Billion was spent on trading transaction fees last year¹. Whether a trader trades 50 kbbls of oil or 500 kbbls, the actual work is the same. There is nothing materially different about the workflow from a process or operational perspective nor is the trade more complicated or onerous when larger amounts of oil are traded. So, why should companies pay 10 times more in trading transaction fees? They shouldn’t. Is there a trading model that can change this? It is finally here!

The idea of BLOC-X was born in 2018 but the seed was planted many years earlier out of my personal frustration caused by an inefficient oil market. Having spent the first three-quarters of my career trading oil and the last quarter in a financial technology company, I was fortunate to be exposed to a market that is undoubtedly entering a fundamental transition.

To step back for a moment, prior to 2008, derivative markets in many asset classes were being traded on a fully bilateral basis with very little in the way of CCPs (Central Counterparty Clearing House). As the financial crisis unfolded, this began to rapidly shift into a CCP model with ICE and CME emerging as the dominant players in the global energy space.

What happened in 2012 on the regulatory front was game changing for oil trading. In January 2013, all the so called over-the-counter (OTC) cleared energy swaps became futures and thus were bound by futures regulation. At the time, University of Houston Professor Craig Pirrong analysed the issue on his Streetwise professor blog: “Nothing changes but the name.” He went on, “the contracts are already standardised, traded on an electronic platform and cleared. This is not a movement of bespoke, uncleared, bilateral contracts onto an exchange. It’s long been known that the economic substance of swaps and futures are effectively identical, especially when the former are cleared,” Pirrong wrote. “Changing the label – hell, call them bananas – doesn’t change the economics. If the Commodity Futures Trading Commission (CFTC) had less burdensome regulations for bananas, ICE would launch ICE Bananas.”

Why the current model of commodity trading is outdated

The reality was that actually large amounts of these OTC markets were not traded on electronic platforms and were still being negotiated over chat and telephone – a process that still perpetuates to this day. The commodity markets, most notably oil, have seen margin pressures on profitability on a fairly consistent basis since the heydays of the late 2000s. The increasing burden of regulatory compliance and the ever-spiraling costs of trading and data in derivatives markets have been a bugbear of the industry for some time. The same question was being asked time and again in London, Geneva and Singapore. When firms and individual traders had seen such huge compressions in profitability why, in many areas of their businesses, was there so little compression in the costs of doing business?

Whilst there are a few well known consortiums such as VAKT and Komgo focusing on leveraging blockchain based technologies to solve much needed efficiencies in post trade workflows and trade finance, it was our view that there were much more obvious opportunities to be solved especially when we examined the evolution of other asset classes.

It became apparent that the piece that had the highest sensitivity through organisations was cost. Digging a little deeper there were other trends that emerged that were more specific to oil such as the need for technology to level the trading field and to treat all participants equally which was not the case in the current marketplace. Protection of information was also of paramount importance to the commodity community and there was a sense of dissatisfaction with the ‘leakage’ that currently existed.

The message was very clear – the industry was already trying to find ways to solve these problems even if it meant reverting to potentially less efficient ways of trading such as speaking directly to one another on a B2B basis to remove transaction fees and ensure no information leakage.

How digitalisation is changing commodity trading

And it is from here that the idea for BLOC-X really came about. BLOC-X, a provider of electronic trading software for OTC Oil Block Future markets, has been built from an organizational and technological perspective to solve these challenges. Being a software provider, not owned by an exchange, a bank or a broker, gives us true independence. All market actors can and should be treated equally with no limitations to their price transparency or information governance – we treat information security extremely seriously. Above all, we believe that efficiency gains through the use of technology must be passed onto end users – something that just doesn’t happen now. This is why we are changing the entire model of transaction costs in OTC Block markets.

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BLOC-X is a SaaS based provider of trading and execution management software and not a trading venue. All trading activity occurs with the designated trading venue. BLOC-X does not arrange deals in investments, deal in investments as an agent or operate an OTF or MTF.

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